Q&A: Fed's Lacker on bank crisis, Bernanke and the economy

For nearly a decade, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, has overseen a district that runs from Maryland to South Carolina during an economic boom, a banking crisis, a recession and now a tepid recovery.

The turmoil wasn't what he expected when he succeeded Al Broaddus Jr. in 2004 as the seventh leader of the Richmond Fed, one of 12 districts that compose the Federal Reserve System.

"I remember thinking that our challenges would be small relative to say the challenges former Chairman Paul Volcker faced or former Chairman Alan Greenspan," Lacker said in a recent interview.

"But I was wrong, and I should have known. Back when I was a research economist in the '90s, I wrote about central bank lending and about 'too big to fail,' but I didn't think it would pose a problem of the ferocity that it did. It's been a sobering 10 years. Let's put it that way."

During his tenure, Lacker, 58, has spoken out against government bailouts of the banking industry, and in the past year has voted against the Fed's buying of mortgage-backed bonds as a way to stimulate the economy, citing concerns about the Fed's ballooning balance sheet. In his role, he sits on the Federal Open Market Committee that makes key interest-rate decisions but isn't a voting member until 2015 as part of a rotation among regional presidents.

During a recent visit to Charlotte, N.C., where the Richmond Fed has a branch office, Lacker discussed his views on the economy, the financial crisis, too-big-to-fail banks, outgoing Fed Chairman Ben Bernanke and his likely replacement, Federal Reserve Board Vice Chairman Janet Yellen. Questions and answers were edited for clarity and brevity.

QUESTION: How has the government shutdown affected the economy?

ANSWER: There were a lot of workers who lost wages. Some have gotten back pay, but some contractors didn't. But the effect is relatively small in the grand scheme of things. The broader issue is the corrosion of confidence in our governing institutions. Like a lot of economists, I'd really like to see some compromise that gives the country a sustainable fiscal plan going forward. What we have isn't, in the long run, sustainable. Until we adopt that, there is going to be an uncertainty hanging over everyone's head.

Q: What was it like being at the Richmond Fed five years ago during the financial crisis?

A: It was pretty hectic, especially down here at the Charlotte branch. A lot of late nights. A lot of weekends. A lot of pizza. We were sharing information pretty closely with our colleagues in New York. There was a lot happening fast. There were different points of view of interpretations of what we were going through, and so there were different philosophies in terms of policies of what we should be doing. But those things got hashed out.

Q: You have spoken a lot about living wills (plans submitted by large banks under the Dodd-Frank financial reform act that show how a bank can be taken apart in bankruptcy) as a way to end concerns that some banks are too big to fail and will get bailouts in a crisis. Where are we in that process?

A: I don't think we are where we need to be, but we're making good progress. I think people have learned a lot over the last two years in preparing these reports about what a bankruptcy filing for a large bank holding company would look like. The key objective is that in a crisis this is something a policymaker would choose as the course of action to resolve a large financial institution using the U.S. bankruptcy code, which is what it's made for, without extraordinary government support. If we can't get to a point where people believe policymakers would make the choice of bankruptcy in a crisis, then we're going to have too big to fail with us, because creditors will believe they will get rescued in a crisis, and we will have solved very little.

Q: Is it possible that living wills will end too big to fail?

A: I'm hoping it will be. I think living wills are our only hope. Higher capital requirements, tougher liquidity requirements are obviously important. But after you've run through your capital, there is this question: 'What then'' If you don't have an answer to that, you're still going to have a problem. I think it's essential.

Q: You recently spoke about the value of the Federal Reserve keeping its independence from outside political influences. Why is this so important?